Where to hold your startup’s money

Inspired by Brad Feld‘s post Cash Policies for Startups, I decided to write about where I think startups should keep their money. Hopefully I’ll be adding some value to the discussion by including specific recommendations for startups in Turkey.

When a startup raises money, it’s usually to provide the company with enough runway to execute against its goals for the next 18 to 24 months. Since all the cash won’t be used at once, the startup needs to decide what to do with the money.

The first question is what currency you should hold the money in. While it makes sense for our US startups to hold the money in dollars, should our Turkish startups hold the money in Turkish lira or dollars?

On one hand it’s wise to keep your cash in the same currency as the majority of your expenses. For most startups, the majority of their expenses consists of wages, marketing, and perhaps inventory. For Turkish startups, the first and second will likely be denominated in lira while the third will be in lira or foreign currency depending on the extent to which the business relies on the import of final or intermediary goods. This approach suggests that you should hold your money in lira.

On the other hand the lira has lost over 60% of its value against the dollar over the last two years. While we don’t know whether it will rise or fall in the future, and startups shouldn’t be in the business of trying to predict this, we can be fairly sure that the lira will experience greater volatility than the dollar. While the dollar may fall in value against the lira, it probably won’t decline as much. If the lira falls, it may lose much more of its value as the last two years have shown. Minimizing your downside exposure suggests that you should hold your money in dollars.

These observations suggest that you should hold your money in different currencies so there’s no right answer here. However, if I was an entrepreneur I’d minimize my downside exposure and hold my money in dollars.

Now that you’ve decided what currency to hold the money in, what instrument should you hold it in? While the currency denomination is up for debate, here I believe that there’s a much more unambiguous correct answer.

One option is to let the money sit in your checking or savings account. This option means that the money collects very little if any interest, and likely loses value relative to inflation. I don’t recommend this option.

At the other end of the risk spectrum, you can invest the money in bonds or even stocks which have the potential to generate a high return but also carry high volatility. Since you’re building a tech company you likely don’t have the knowledge or time to follow the markets so this approach is the same as gambling. I don’t recommend it.

A nice balance to conserve the principal amount of your investment while also generating a safe return is to keep your money in a short-term time deposit in Turkey. This is the equivalent of a certificate of deposit in the US. Online-only banks which are able to offer higher rates than their offline counterparts because of their lower cost structures currently offer annual returns around 2.20% for dollars and 11.75% for liras held in 32-day time deposits.